Standing Committee A

[Sir John Butterfill in the Chair]

Finance Bill

(except clauses 4, 5, 20, 28, 57 to 77, 86, 111 and 282 to 289, and schedules 1, 3, 11, 12, 21 and 37 to 39) - Clause 30 - Provision not at arm's length: transations between UK taxpayers

Question proposed [this day], That the clause stand part of the Bill. 
 Question again proposed.

Dawn Primarolo: I welcome you to the chair for our deliberations this afternoon, Sir John. It is a pleasure to see you, and I will be extremely careful, as always, because you will be paying close attention to the many areas of discussion on which you are very knowledgeable.
 Before we broke from this morning's sitting, we were considering clause 30 on transfer pricing. I have dealt with the specifics in the questions from the hon. Member for Hertford and Stortford (Mr. Prisk), and in my closing remarks I wish to clarify the purpose of the clause. 
 This morning we discussed issues around transfer pricing. The rules are vital to ensure that businesses, especially multinationals, are taxed fairly in respect of their activities in the United Kingdom. Until now, taxes have applied only to cross-border transactions. Doubt had been thrown on their effectiveness because of decisions made in the European Court of Justice on the tax rules of other countries. Clauses 30 to 37 address the uncertainties that business has identified. 
 I also made it clear this morning that, although the Government are responding to those uncertainties, we will defend any challenges to existing UK legislation. I am perfectly at ease with the proposal, and I explained to the Committee that we are content. My officials advise me that the proposals cause no further uncertainty; rather they provide the structure that the companies concerned wish to see.

John Burnett: I, too, welcome you, Sir John. The Paymaster General is, as usual, being patient. She will recall that this morning I alluded to tax harmonisation, to which I am utterly opposed, in the points that I made about what the Spanish Government are doing about transfer pricing and thin capitalisation.
 I have received a brief from the Institute of Directors, which I am sure the Paymaster General has seen. The institute makes an excellent point, which is very relevant to what she has just said about the encroachment on our independent, sovereign power to tax. It reluctantly concludes that 
''the Government had little choice but to pass this legislation, although we continue to call for an amendment to the European Treaties''—
 it splits an infinitive but I will not—explicitly to allow 
''member states to ''discriminate'' in tax matters.''
 I would very much favour that, and I look forward to hearing the right hon. Lady's views on such an amendment to the treaty.

Dawn Primarolo: Transfer pricing regulations and tax guidance are not the subject of amendments to the treaty. As I explained this morning, the UK has operated those provisions for some time, following the principles laid down and recommended by the Organisation for Economic Co-operation and Development. The Inland Revenue operates them with some aplomb. Transfer pricing regulations and rules are about insuring and protecting the corporate tax base of this country. As I said a number of times this morning, the Government and the Inland Revenue considered that our legislation was compatible, but we also recognised that it was essential, because of the response of business and its view that there was uncertainty, that we put these matters beyond doubt. That is what clauses 30 to 37 do.
 The Government have repeatedly made clear their views on tax harmonisation. On behalf of the Government, I have in various Committees of this House and in different debates made it clear that they do not subscribe to tax harmonisation and that they continue to argue in every forum for the right of member states to determine their own tax rates. 
 As tempted as I am to probe whether the hon. Gentleman may be more at ease on the Government Benches with regard to policies on tax and the European Union, I fear that you will say that I am going beyond the scope of the clause, Sir John. Perhaps I should stick to clause 30, unless the hon. Gentleman wishes to stand up and declare himself so in support of this Government that we can welcome him to our Benches.

John Burnett: I am certainly not going to make the intervention that the Paymaster General invites me to make, but—

Stephen Pound: It is seductive.

John Burnett: We come back to seduction. I am being led astray by the hon. Gentleman again.
 Regrettably, a growing body of EU legal cases continues to encroach on our ability to set our own taxes and to have our own UK competitive tax system. That is especially so in the corporate sector. Will the Paymaster General and her erudite and eminent colleagues at the Treasury consider an amendment to the EU treaties enabling—

John Butterfill: Order. The hon. Gentleman is straying way beyond the scope of the clause. However fascinating the Government's opinion on this subject may be, the Paymaster General has already made their view clear and I would be grateful if she was not tempted down that route again when responding to the intervention.

Dawn Primarolo: In that case, I will return to the discussion on the impact of clause 30. The hon. Member for Torridge and West Devon (Mr. Burnett) touched on the following point this morning. Clauses 30 to 37 deal with each element involved. As a combination, the clauses are broadly revenue-neutral. I am responding to points that hon. Members have made, but it is probably more relevant to discuss this matter as we go through the clauses.
 However, the Government recognise that the extension of the transfer pricing requirements has the potential to increase administrative requirements on companies, so following discussions with business the clauses implement a package of measures to mitigate the effect of the change. Examples include the exemption for small and medium-sized companies under clause 31, which we will be able to probe later, and considerations involving dormant companies for the 1 April 2004 period. 
 The hon. Member for Hertford and Stortford touched on administrative pressure. Clause 33 relates to the relaxation of penalties for record keeping for a transitional period. That touches on the question that the hon. Gentleman raised, namely why we do not delay. I have explained why delay is not possible, given the uncertainty. Therefore, in consultation with business, the Government sought other arrangements to provide that transition period. The hon. Gentleman also touched on the question of loans. As he knows, we deal with the question of securitisation in later clauses, so he will forgive me if I do not deal with those specific points now. 
 Clause 30 extends the scope of transfer pricing requirements to include United Kingdom transactions, in order to address the uncertainty that has arisen in the existing legislation. The clause also extends the scope of the existing rules for compensating adjustments, which enables double taxation to be addressed, so that an increase in the taxable profits of one company can be reflected in a compensatory adjustment of taxable profits in another. The clause introduces a new system of balancing payments. Where a transfer pricing adjustment has been made for tax purposes, a group can make a payment with no further tax consequences, either for the payer or the recipient, to keep its cash position in line with its tax position. Finally, clause 30 gives effect to schedule 5, which makes the detailed consequential amendments to the existing legislation. So, clause 30 deals with the scope of the existing rules, their extension to UK transactions, compensatory adjustments and the introduction of balancing payments. 
 As I said, the uncertainty must be addressed because of its consequences for business at present. I touched on that this morning with regard to keeping open accounts. That is why, in giving business time to adapt fully to the system, we are, first, relaxing penalties for a transition period of two years, and secondly taking steps to minimise the effect on business. The hon. Gentleman touched on the question of investment. It is important to remember that there will be no effect on investment because the question that transfer pricing deals with is which 
 company a profit arises in, not what the overall level of taxable profit is. 
 The hon. Gentleman also touched on the question of royalties in a group. Groups of companies are used to charging royalties on cross-border transactions. It is true that those will, in some cases, become a requirement under UK law. That is an example of what transfer pricing means. We are acting to restore certainty about the effectiveness of the rules, which are essential to defend the corporate tax base of the UK, and we have taken important steps to mitigate the increased requirement on some companies. As I said, we will come to various other requirements in subsequent clauses and, in particular, to the exemption that will cover 95 per cent. of small and medium-sized companies. 
 The hon. Gentleman said that we were responding to corporate tax reform on a piecemeal basis. He will not be surprised to hear that I do not agree with that suggestion. We recognise the need to have a wide-ranging dialogue with business concerning all the implications of the corporate tax system, including recent developments in European law, and, in particular, considering our corporate tax system and whether it has responded, and is relevant, to the changing needs of companies, the economy and the world economy. That commitment to a dialogue was clearly set out in both the pre-Budget report and the Budget. The issue for the Government, based on what companies were saying to us, was that ongoing dialogue, which covers a wide range of areas, does not remove the urgent need for action on transfer pricing.

Mark Prisk: My concern is that there should be a strategic view underscoring the provisions. Without wishing to stretch your patience too far, Sir John, we were hoping for a glimpse of that strategy. We would be happy for the Government to adopt a broad view on where the lines can be drawn vis-à-vis the scope and remit of the ECJ. I understand that that would go too far beyond the scope of the debate, but it would be helpful if the Minister told us that such a strategy is being considered, and whether there will be an opportunity in the not-too-distant future for the House to consider that strategy.

Dawn Primarolo: With respect, the corporate tax review and the dialogue that has been going on for nearly two years address a more fundamental question: the appropriateness of, and the response to, a whole range of measures in the corporate tax system ranging from capital allowances to schedules. The review raises the question of how to assist investment, and the consultation on that was published at the time of the pre-Budget report on assisting companies with equity finance.
 There is a much more fundamental debate concerning how we ensure that our corporate tax system is responsive and secures revenue, but is also broad-based, intervenes at the correct time where there is market failure and ensures that companies are able 
 to develop and grow while meeting the challenges of the UK and global economy. 
 On the question of ECJ rulings, the hon. Gentleman will have to accept that it would be foolish of the Government to try to assume what the ECJ may say in future about cases which may or may not come before it. The Government's purpose is to develop a robust, active corporate tax system which is on all fours with the legal requirements, and that is precisely what we are doing. The hon. Gentleman's obsession with the ECJ blurs a more strategic focus on what the corporate tax system should look like. 
 The discussion with business has been very productive and is continuing, but it has far-reaching consequences for changes in the tax system. The hon. Gentleman should remember the changes to intellectual property rights, research and development tax credits, and capital gains tax or the improvements to the taper, where we moved away from indexation. There is a question of the speed at which agreement is achieved by business and Government as we take on these changes. 
Mr. Prisk rose—

John Butterfill: Order. With great respect to the hon. Gentleman and the right hon. Lady, I think that she has been tempted down this road quite far enough. It is well removed from the scope of the clause. It is perhaps an important matter for another debate at another time, perhaps in a different place, but not in this Committee.

Dawn Primarolo: Forgive me, Sir John. I was trying to assist the Committee, but I realise that I have gone way beyond my focus on clause 30, and I am grateful to you for drawing me back to the subject.
 It is a requirement of any Government to ensure that uncertainties, real or otherwise, that business identifies as affecting its behaviour are dealt with. The clauses, of which clause 30 is the first, will remove all doubt identified by business, regardless of whether the Government believed that there should have been any uncertainty. 
 I hope that as the debate progresses the Committee will accept not only that the Government work closely with business in discussing the issues—and have responded to its requests in several places in the clauses—but that we made it very clear that there were no other suggestions or possibilities for dealing with the matter, and no other suggestions were advanced. I commend clause 30 to the Committee. 
 Question put and agreed to. 
 Clause 30 ordered to stand part of the Bill. 
 Schedule 5 agreed to.

Clause 31 - Exemptions for dormant companies and

Mark Prisk: I beg to move amendment No. 9, in
clause 31, page 26, line 9, at end insert— 
 '5AA(1) Paragraph 1(2) above does not apply in computing for any chargeable period the profits and losses of a potentially 
advantaged person if that person is a company which is dormant but which does not satisfy the condition in paragraph 5A(2). 
 (2) Sub-paragraph (1) above does not apply in respect of any accounting period of a company if the Board gives the company a notice under this sub-paragraph requiring the company to compute the profits and losses of that accounting period in accordance with paragraph 1(2) above. 
 (3) A notice may be given in accordance with sub-paragraph (2) above only if the Board has reasonable grounds to believe that in that accounting period the company has been party to any transaction in respect of which provision has been made or imposed otherwise than for bona fide commercial reasons or as part of a scheme or arrangements for the avoidance of tax. 
 (4) In this paragraph ''dormant'' has the same meaning as in section 249AA of the Companies Act 1985 (see subsections (4) to (7) of that section).'.

John Butterfill: With this it will be convenient to discuss the following:
 Amendment No. 10, in 
clause 31, page 26, line 9, at end insert— 
 '5AB(1) Paragraph 1(2) above does not apply in computing for any chargeable period the profits and losses of a potentially advantaged person if that person is a company which satisfies the condition in sub-paragraph (2) below. 
 (2) The condition is that either— 
 (a) the company is in insolvent liquidation; 
 (b) the company is in insolvent administration; 
 (c) an appointment of a provisional liquidator is in force in relation to the company under section 135 of the Insolvency Act 1986 or Article 115 of the Insolvency (Northern Ireland) Order 1989; 
 (d) the company is in insolvent administrative receivership; or 
 (e) under the law of a country or territory outside the United Kingdom, circumstances exist corresponding to any of those described in paragraphs (a) to (d) above. 
 (3) For the purposes of this paragraph, the company is in insolvent liquidation, in insolvent administration or in insolvent administrative receivership if it is in insolvent liquidation, insolvent administration or insolvent administrative receivership for the purposes of paragraph 6A of Schedule 9 to the Finance Act 1996.'.

Mark Prisk: This is my first speech this afternoon and I am pleased to welcome you to the Chair, Sir John. I am sure that you will continue to guide us and keep us on the straight and narrow.
 The clause seeks to provide a range of exemptions for dormant companies and small and medium-sized enterprises in the context of transfer pricing. The amendments are probing. 
 The purpose of amendment No. 9 is to extend the exemption for dormant companies to include those that become dormant after 1 April this year. A company is dormant and, therefore, exempt from the requirement to prepare a report and accounts during any period for which it has no significant accounting transaction. The imposition on such enterprises of the proposed transfer pricing adjustments for UK companies would give rise to accounting transactions that would cause many currently dormant companies to lose that status. The effect would be to require UK groups to prepare a report and accounts for those companies. 
 The Government have sought to address the issue by providing an exemption from the transfer pricing rules for companies that were dormant prior to the commencement of the new regime. The current 
 exemption will not extend to companies that become dormant after 1 April 2004. Many companies cannot be liquidated, whether for tax, name protection or other reasons, and unless the exemption is extended those companies could be brought within the regime and be required to prepare a report and accounts under existing company law rules. 
 I appreciate that the Inland Revenue's concern is that dormant companies might—I emphasise ''might''—be used as a conduit for transactions that might otherwise be caught by the rules and that that might be inappropriate in some circumstances. Many people believe and have argued—I understand this, although I am no tax expert in this context—that there could be a reserve power to bring such companies within the scope of the rules in tax avoidance cases. I would be grateful if the Minister commented on that because that might solve the problem that has been identified. 
 Under amendment No. 10, companies that are in insolvent liquidation, administrative receivership or administration would be excluded from the rules. Many people believe that such companies should be excluded and that the obligation to prepare the documentation should be removed for a number of reasons. First, in most cases, those companies will be part of a group and their debtors will also be insolvent and, therefore, unable to make adjustments to, or, for that matter, even to repay, debt that is outstanding at the date on which the process begins. Secondly, an insolvent company is limited by insolvency law in the transactions that it can enter into, and that is relevant. The arm's-length principle at the heart of the transfer pricing mechanism cannot be readily applied in those circumstances. Thirdly, there is a danger that the cost of compliance will fall on creditors, who in such circumstances will already have suffered considerable losses. The idea behind the amendment is to establish the Government's response to the argument that insolvent companies should be exempt. 
 I hope that with those explanations we can look forward to a positive response from the Minister.

John Burnett: I do not want to repeat the points made by the hon. Gentleman, although I have sympathy with what he asserted. The lack of amendment No. 9 will provide simplicity, but there is no real reason why the benefit of simplification should be significantly denied if we agree to it. To avoid unnecessary compliance burdens, exemption should be available to companies whenever they become dormant. The number of companies that become dormant after 31 March is not likely to be great, and any potential risk to the Exchequer could be eliminated by introducing a clearance procedure as a precondition of exemption for newly dormant companies. That comes to me in a briefing from the Confederation of British Industry. It would enable a smoother and fairer operation of the transfer pricing rules. I shall not repeat the remarks about how difficult it is to debate the subject, given the straitjacket of EU rules. I look forward to hearing
 the Paymaster General's comments on the amendment.

Dawn Primarolo: In the consultation before the Budget, we received many representations that a consequence of extending the transfer pricing rules to domestic transactions would be to cause many companies to cease to be dormant. As the hon. Gentlemen pointed out, that would cause significant administrative costs.
 The Government are sympathetic to the representations, but there are two important constraints on what we can do. First, we must ensure that we do not create uncertainty under European law. We cannot treat dormant companies with a foreign parent less favourably than dormant companies with a UK parent. Secondly, we must ensure that we do not create an opportunity for dormant companies to be used as a conduit for extracting profits from the UK without paying tax. That is by far the greater danger to the corporate tax base, in that it would be possible for a group to transfer income-generating assets to a company and then allow that company to become dormant. Such planning cannot be done if the exemption is limited to companies that are dormant at 1 April 2004. I am sure that neither hon. Gentleman needs to engage in a leap of the imagination to understand that the opportunity to create dormant companies at any time would also create the opportunity to extract profits from the UK without paying tax in the UK.

John Burnett: I think I referred the Paymaster General to the fact that the problem of loss to the Exchequer resulting from use of a post-31 March 2004 dormant company could be avoided if the Government were to introduce a clearance procedure as a precondition for exemption of newly dormant companies.

Dawn Primarolo: This is the problem. Groups might be able to use insolvent companies as a means of washing out tax liabilities in the same way as for companies that became dormant. That is a real problem. I find it a little odd that, in a situation in which there is such a risk to the corporate tax base, the hon. Gentleman, who normally impresses on the Government that they should aim for simplicity and not add complexity, seeks to put more layers into the tax system in order to prevent what he knows will happen without that protection. It seems better not to provide the opportunity in the first place.
 The Government's proposals provide that companies that are dormant on 1 April 2004, but not those that subsequently become dormant, satisfy the two constraints that I have identified. The hon. Member for Hertford and Stortford suggested that a reserve power in the amendment might be able to be operated. That is not a practical alternative. A dormant company is not required to provide a return to the Inland Revenue. It would be impossible to police any special rules using a reserve power because the Inland Revenue would never see the information in the first place, unless—this is not provided for in the Bill—we had another battery of arrangements to 
 specify when and how it should be notified. We would require all that because, as the hon. Gentleman recognises, there is the potential for dormants to be used to extract profit. It seems much more sensible not to provide the opportunity in the first place.

Mark Prisk: I fully appreciate what the Paymaster General is saying, although the call is perhaps slightly closer than she suggests. Inevitably, a number of innocent enterprises will be caught. Was any consideration given, before the legislation was prepared, to making the date 1 May, or even 1 June? In other words, does she recognise that the sudden cut-off—there is no time gap: the Bill was published seven days after the date we are discussing—made it very difficult for any enterprise, however innocent, to take advantage of the provision?

Dawn Primarolo: We are not talking about innocents—we are talking about using dormant companies to extract profit without paying tax. Any delay or any period that opened up the possibility of removing profit and therefore escaping UK tax would not be acceptable.
 All these routes lead to mischief, not to a practical reason why what the hon. Gentleman proposes is necessary. Why would we knowingly allow in the system an opportunity for mischief and then say, ''Well, we hope that you won't undertake this mischief, but just in case you do we're going to do X, Y and Z''? Why would we have even more complicated rules when hon. Members have already rightly pointed out, only two clauses into this chapter, how complex transfer pricing is in the first place? 
 The problem with the measure being triggered, as the hon. Gentleman would like, by some sort of reserve power, is deciding when that reserve power would be used. Would it be used only when the Revenue believed mischief was being undertaken? Given that the Board would identify any such practice as mischief, we come back to the same argument. Even if the Government were prepared to allow it, which we are not, there would be huge difficulty in drawing the distinction between cross-border and UK. The uncertainty—the very thing that we are designing out of the system in response to business—would be reinserted in a different dimension with a different set of rules. 
 The hon. Gentleman has not made a case for the necessity of his proposal. What business function does it provide for? We dealt with dormants in a certain way up until 1 April 2004. There would have been administrative pressure where the companies were dormant, and we were responding to business and trying to be helpful. 
 The question of insolvency is very important. Insolvency rules serve to protect the position of creditors and other interested parties when a company becomes insolvent. Insolvency is not a reason to relieve a company of transfer pricing requirements; the reverse should be true. Transfer pricing requirements ensure that the transactions between associated enterprises are priced on an arm's-length basis for tax purposes. If insolvent companies within a group were removed from 
 transfer pricing requirements, which is what the hon. Gentleman seeks to do through his amendments, there would be opportunities for the group to use them to reduce taxable profits in the UK. As a Minister, I am not prepared to allow the Exchequer risk that goes with that. 
 I understand the importance of the questions around dormant companies. In the clause, we have responded very positively to business by making sensible arrangements up to 1 April 2004. I am not prepared to take the next step that the hon. Gentleman suggests I might consider, which would be to leave a gap in the rules with the possibility of profit being extracted and escaping UK tax. That is not acceptable, so I hope that he now understands why we chose the dates that we did, and on that basis will refrain from pressing his amendments. If he does not, I will ask my hon. Friends to oppose them should there be a Division.

Mark Prisk: We have had a useful discussion on an essential element of the rules. I concur with the Paymaster General that certainty is crucial, but I am not clear that the date chosen was the best date for the benefit of business. The debate about amendments Nos. 9 and 10 revealed that the Minister assumed that all business activity in that area is mischief. That is an unfortunate assumption. I understand that it might be the case—who knows, were I to be in her position, I might come to that view. However, it is not the right view.
 I accept that lines have to be drawn, but the danger is that that assumption is more revealing about the Government's position on tax avoidance and their confusion between avoidance and evasion than about anything else. However, I stated that the proposals were probing, and I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn.

Mark Prisk: I beg to move amendment No. 11, in
clause 31, page 29, leave out lines 7 to 13.
 This probing amendment is essentially about time. The definitions of small enterprise and medium-sized enterprise should be determined by the results of the prior period rather than by reference to the chargeable period in question. 
 Under the drafting of paragraph 5D of schedule 28AA to the Taxes Act 1988, the definitions of small and of medium-sized enterprises in the Commission's recommendation are amended for the purposes of the rules so that the various tests are applied by reference to the chargeable period in question and not by reference to a prior period. 
 I am sure that there are many circumstances that Committee members can remember when companies in their constituencies crossed that threshold in the course of an accounting period. Companies may not be aware that they need to maintain the relevant records in preparing documentation on transactions entered into in that period. They will realise that they need to do so in the subsequent period, but perhaps not during that taxable year. That could arise as a 
 result of the natural growth of the company, but it might be something else—for example, a takeover. 
 The provisions of new paragraph 5D amend the definition of small and medium-sized enterprises so that they are determined by reference to the chargeable period in question. As I said, the purpose of the amendment is to recognise that potential confusion and remove it from the Bill.

John Burnett: I, too, have read the brief on this matter that was produced by the Law Society. It is useful and compelling. To protect revenue and to ensure compliance, we will have to use the immediately prior accounting period, as the hon. Gentleman made clear. To use the rules in the existing paragraph 5 would put taxpayer companies in jeopardy of breaking the law when they do not have any idea that that is what they are doing. Companies grow organically and for other reasons, as has been described. It is fair to taxpayer companies to ensure that they can apply their rules and flag up the problem just after an accounting period has ended.
 As the Paymaster General knows, it is important that we have a vibrant corporate and corporation tax system. One of the things that I used to be involved in before coming to the House was the acquisition and sale of companies. Having the rules as the Government have outlined would inhibit such transactions because it would provide another hurdle for the company to overcome and to give warranties over when a share sale is being agreed and transacted. 
 For simplicity's sake—the Paymaster General has always persuaded me that simplicity is frequently if not invariably important, and I am sympathetic to that idea—it would be wiser to take out paragraph 5, as the amendment would do. It is a case of simplification, it would enable the smooth running of the corporation tax system and it would reduce yet another burden on business.

Dawn Primarolo: The clause introduces an exemption for small and medium-sized enterprises in order to ensure that the change in the scope of transfer pricing does not lead to increased regulatory burdens for companies. For that purpose, the legislation draws on an updated European Union definition of small and medium-sized enterprises. The EU definition considers the characteristics of an enterprise in the preceding period to establish whether it is small or medium-sized in the current period.
 For the purpose of the clause, however, we need to consider the current period. I want to explain why we need to do that. To do otherwise would create an unacceptable risk of abuse. I have been through the matter in some detail with my officials to ensure that there really is an issue and the requirements are reasonable.

Mark Prisk: I am sure that the Paymaster General has been assiduous. Could she establish for us the scale of the risk, as it is difficult to judge?

Dawn Primarolo: I was going to do that. The first thing that the hon. Gentleman must remember is that transfer pricing involves vast amounts of money that can be moved around within a group. Although I am not able to say to him that the amount would be x—obviously, the amount would depend on how quickly tax planning developed—I wish to explain how transfer pricing works. It really is quite simple and straightforward, and the risk is clear.
 A large group of companies might acquire a small company from outside the group. If the exemption remained in place for a further year after the acquisition, the group would be in a position to exploit it by routing transactions through the new company, which would still be treated as a small company under the exemption. The whole point of transfer pricing is to prevent such things from happening. I kept asking my officials whether that would really happen, and they kept saying yes. What is more, with the amount of money at stake being so vast, it would be worth while for a large group to do that to achieve a tax saving. 
 The existence of the exemption would create a simple means for groups to sidestep transfer pricing rules, at least for that year. Clearly, it would not be acceptable to introduce a weakness into the rules that would provide a vehicle for removing profit without paying tax in the UK. I am sure that the hon. Gentleman would agree with that. As difficult as it may be to accept that such things happen, I assure him that they do. The reason for looking at the current year is that it is important to know the company's position at a given time.

John Burnett: How will small companies on the threshold of growth operate under such a system? Will they have to make a monthly check to determine whether they fall within or without the small and medium-sized exemption?

Dawn Primarolo: I am grateful to the hon. Gentleman for continuing to anticipate what I am going to say next. I am becoming more and more convinced that he is sitting on the wrong side of the Room. Before I answer his question, does he accept that it would be unfair to other companies that apply the rules and do not seek to indulge in such tax planning to leave that loophole? It would be unacceptable for the Government even to contemplate introducing a set of rules if they knew that such activities were possible.
 The hon. Gentleman asked how a small or medium-sized company would know when it crossed the threshold. We will come to that again on later clauses. The Government recognised that changes to record keeping cannot be achieved overnight and provided the temporary relaxation of the penalties for that reason. It is incorrect to suggest that those companies whose financial data show that they are close to the threshold—that they are not miles away—but choose not to account for all their transactions on an arm's-length basis will be caught unawares during an accounting period. Such companies must take account of their forecast growth—and they will—to ensure that their record keeping remains adequate for a whole range of reasons as well as transfer pricing. 
 They will, therefore, have done so well before the period in which the SME exemption is lost. We shall discuss later the relaxation of the penalties. 
 The only other possibility, which was touched on by the hon. Member for Hertford and Stortford, is a hostile takeover. Hostile takeovers are not a feature of small and medium-sized enterprises: any takeover would be the result of negotiations over a reasonable period, during which the larger company will have fully acquainted itself with the business it is acquiring. The acquiring group will have acquainted itself fully with the business for a host of tax and non-tax reasons, and that process will include reviewing the appropriate documentation and record-keeping systems required. The position the Government have taken is to strike a fair and reasonable balance in, wherever possible, removing small and medium-sized companies from the provisions by providing exemptions, while not leaving in place a mechanism whereby such companies could be used as a vehicle by larger groups to extract profit from the UK without the payment of UK tax.

Mark Prisk: The Paymaster General has rightly highlighted the potential risk when a larger company acquires a smaller one for the purposes she describes. However, I referred to another aspect, which is the natural growth of a small company that may find itself tipped over the threshold. Clearly, in that situation no larger company is involved that is seeking to use that acquisition for the purpose of avoiding the rules, as she puts it. Is it not the case that that is a different set of circumstances to the one that she described? The risk that she ascribed to that situation is not appropriate in relation to the natural growth of a small company.

Dawn Primarolo: No. The hon. Gentleman perhaps misunderstands my point.
 Sitting suspended for a Division in the House. 
 On resuming—

Dawn Primarolo: The hon. Member for Hertford and Stortford asked about companies that tip over the threshold into loss of exemption. We are not discussing tiny companies, and by the time they are moving through the threshold they are substantial in terms of the number of employees, turnover and balance sheet assets. I made the point that with their planning, forecasting and use of data, they will not accidentally trip over that threshold. They will know when they are approaching it, and other issues will arise when moving from being small and medium-sized companies—for instance, the full corporate tax rate will apply. It is not unreasonable to assert that companies will track that closely in their forecasts.
 A second point, which goes back to the Government's starting point in their discussions with businesses, is that, at each point, we have attempted to put in a simple arrangement for exemption to enable businesses to deal with the majority problem that has been identified, particularly for small and medium-sized companies. The European Union definition does 
 not distinguish between growth and takeover. However, it is a widely recognised and very generous identification, and the limit for exemption is likewise generous to companies. Without devoting many pages of legislation to our own definition to address the point, it is simply not possible to make the distinction that the hon. Gentleman is driving at. We have relied on penalties and relaxation of penalties, information given to companies and the transition period, building on what we know companies will already be doing in their growth forecasts. That is the sensible way in which to proceed. As I said in my opening comments, something like 95 per cent. of companies that will be designated as small and medium-sized will be well within the exemption and it will work very well.

Mark Prisk: I understand the point that the Paymaster General is making in legislation, and that is absolutely right, but it would help those companies—I accept that it will be a small group—that have naturally grown over the threshold and found themselves caught by the problem that I identified in the amendment if she would say that the Revenue would look that with due care and attention. I am talking not about companies that have been taken over by larger companies—the risk that she highlighted earlier was correct—but about those that have grown naturally. If she would confirm that the Revenue will deal with that sensitively and carefully, that would be very persuasive.

Dawn Primarolo: The Revenue always deals with transfer pricing matters and any other matter carefully. That is precisely recognised by the clauses on penalties under which there is a relaxation for the transition period. Penalties will not be imposed on record keeping within the limits that we shall discuss when we come to that debate. The balance is already being struck, not only on how the Revenue will respond at the time, but on the preparations that it is making in guidance and the specifics in the clauses to help that transition period for those companies so that everything has been provided for that sensibly could have been provided for, given the balance that we are trying to strike with maximum assistance and minimum requirements across the whole range of companies from micro to multinational to comply with the transfer pricing laws. I am satisfied that that is the best balance that we could achieve.

John Burnett: I have had a quick look at clause 33. I do not believe that I am out of order, Sir John, because it is relevant to the point that the hon. Member for Hertford and Stortford is making. The Paymaster General is referring to the transitional period of the Bill. I believe that the hon. Gentleman is saying that there is also a transitional period for a particular company. If a company, during an accounting period, innocently goes over the limit, we hope that the Inland Revenue, in 10 years or whatever, will be relaxed and merciful in relation to penalties and so on.

Dawn Primarolo: I am talking about the transitional period that is provided in the clause on penalties, which we shall come to, to give a period for companies to adjust. I have confirmed that the Inland Revenue deals with such matters carefully at present, and if the hon. Gentleman is trying to tease me down the route
 of saying that it might relax the transfer pricing rules, the answer is no. If the transfer pricing rules apply, they apply on an arm's-length principle and the company, having crossed the threshold, will be required to comply with them.
 The point of the penalties and, therefore, their relaxation for that period is the sensitive approach that the hon. Gentleman is seeking. The transitional period of moving from a small or medium-sized company to a large company is a separate point, and I have already dealt with that. To be honest, I find incredible the hon. Gentleman's suggestion that an already quite large company might not realise that its profit had increased dramatically, it was employing more people and its turnover had greatly increased. Somehow that is supposed to have come as a great surprise, and its forecasts did not show those things. Under those circumstances, I do not see his point.

John Burnett: It can happen. Having spent most of my time in the private sector, I know that a company can, completely innocently, and without knowing anything about the transfer pricing regulations, make a bonanza profit in a year and find itself in a vulnerable position.

Dawn Primarolo: We are talking about transfer pricing, transfer between companies, and how that profit is moved around within a group. We are not talking about individual companies. We are now moving a long way away from the point, which relates to transfer pricing, the arm's-length principle and ensuring that profit is taxed in the appropriate place. It is not unreasonable, given all the guidance and information that is available—such as the specialist advice those companies will already be receiving from their advisers—to assume that companies know about the transfer pricing requirements. The Government are doing all they can to ease the transition and recognise that we need to provide for it. Exemption from transfer pricing, if it applies, is not one of the exemptions that we are about to provide for.

Mark Prisk: This has been an instructive and surprisingly extended debate, but nevertheless a useful one. The Paymaster General has been persuasive on the question of takeovers of companies. She rightly highlighted that, and I entirely concur with what she said—without wanting to encroach on the territory of the hon. Member for Torridge and West Devon in making the most ingratiating remarks to a Minister. I am less persuaded of the argument relating to natural growth, but it has been a useful debate.

John Burnett: I do not want to extend the debate any longer than usual. I have an up-and-down relationship with the Paymaster General. Sometimes it goes terribly well, and sometimes not quite so well. Does the hon. Gentleman take the point that I made in my last intervention on her, that I was not seeking to avoid the transfer pricing rules coming into play, but the penalty regime? A small group of companies exporting could
 make a bonanza profit and fall under the regime. We have to take her point—transfer pricing rules come into play—but what about the penalties? Does the hon. Gentleman agree that an innocent getting into the transfer pricing rules regime should not attract untoward penalties?

Mark Prisk: I concur with the hon. Gentleman, but we are coming to clause 33, which deals specifically with penalties, and we shall be able to consider that matter more closely. I would not wish to get in the way of the relationship of the Paymaster General and the hon. Gentleman, and we are getting much further away from the issue of transfer pricing than you would like, Sir John. However, having listened to the arguments and learned of the apparent relationships, I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Question proposed, That the clause stand part of the Bill.

Mark Prisk: I shall not detain the Committee for very long. I have one simple point that I was not able to raise in the context of an amendment. It relates to the question—and I put in no more strongly than that—whether the clause would adversely affect charities. I suspect that several members of the Committee have received, as I have, representations from charities, including the Charities Tax Reform group. I hope that the Paymaster General will be able to clarify the purpose of the clause in her response, because the concern is that it is in danger of affecting those charities that work in consortiums, purchasing services or using agency personnel. The concern is that in those circumstances they might inadvertently get caught up in the provisions.
 I received a very late offer of a potential amendment, but it arrived too late and I was not able to table it. I hope that the Minister will be able to clarify the matter for the peace of mind of those charitable groups concerned.

Dawn Primarolo: I am happy to reassure the hon. Gentleman. The Inland Revenue recently issued guidance on the matter, which I hope will set hon. Members' minds at rest. Where a charity is acting in the normal way and pursuing its charitable objectives, it is not acting as an enterprise and so is outside the scope of the transfer pricing rules, which apply only to enterprises.
 Only in exceptional circumstances, in which a charity is engaging in commercial activity with a view to profit or gain, would it cross the line and become an enterprise. Re-charging of expenses for the purposes of offsetting costs would not fall into that category. The guidance sets that out in greater detail and it is now available on the Inland Revenue website. I became aware of some concerns yesterday evening, and I hope that that absolute reassurance will put minds at rest. I hope that for those concerned I have provided clarification on the record, and I urge them to see the detail on the website, which they will find very helpful. 
 Question put and agreed to. 
 Clause 31 ordered to stand part of the Bill.

Clause 32 - Special applications of paragraph 6 of

Dawn Primarolo: I beg to move amendment No. 73, in
clause 32, page 30, line 33, leave out '6(3)(a)' and insert '6(2)(a)'.

John Butterfill: With this it will be convenient to discuss Government amendment No. 74.

Dawn Primarolo: The amendments make detailed corrections to the numbering in the clause of two cross-references to existing provisions in the Income and Corporation Taxes Act 1988. The first amendment ensures that the transfer pricing rules work appropriately where trading stock is transferred from one company to an associated person at less than an arm's-length price. The amendment corrects the problem by altering the existing paragraph 6(3)(a) to paragraph 6(2)(a) of schedule 28AA to the 1988 Act, to which new paragraph 6A should have referred.
 The second amendment corrects a similar cross-reference to the controlled foreign company rules by changing the reference in new paragraph 6B(1)(c) to section 747(3) of the 1988 Act, which is the relevant part of the controlled foreign company rules. 
 Unfortunately those errors have only just been identified. They must be corrected in order for the clause to have its intended effect, and I apologise to hon. Members for the need to amend the Bill as published. It needed to be done immediately, as they were straight errors, and I hope that with the indulgence of the Committee the amendments will be accepted.

Mark Prisk: I accept the Paymaster General's apology. I am sure that errors of that nature do occur, and having examined the potential impact of the amendment prior to our deliberations, we fully accept that the purpose is solely to correct errors.
 Amendment agreed to. 
 Amendment made: No. 74, in 
clause 32, page 31, line 12, leave out '747(4)' and insert '747(3)'.—[Dawn Primarolo.]
 Clause 32, as amended, ordered to stand part of the Bill.

Clause 33 - Provision not at arm's length:

Mr. Prisk rose—

John Butterfill: Order. The hon. Gentleman was slow to rise, and we nearly agreed to the clause formally. I do not have supernatural powers and I cannot anticipate what people want to do unless they indicate it to me.
 Question proposed, That the clause stand part of the Bill.

Mark Prisk: Thank you, Sir John. You can see why I would not make a good contestant on ''University Challenge''—my starter for 10 would obviously not make it at all.

Stephen Pound: That is only one reason.

Mark Prisk: I thank the hon. Gentleman for highlighting many of my failings. He is very kind.
 Clause 33 relates to what we were discussing earlier regarding those affected, and the temporary relaxation of penalty liabilities. During the consultation on the issue—it is fair to say that it was a thorough consultation—everybody accepted that the relaxation identified here was welcome. We certainly add our support to that. 
 The crucial requirement here is for clarity. The Paymaster General rightly highlighted the need for clarity in previous debates. Although much of the clause is somewhat convoluted, there is one particular aspect that I would appreciate her confirmation of. After several attempts to read it, I am still unclear about what it means. I refer to subsection (2). It starts: 
''In this section 'records relating to an arm's length provision' means such records as might have been requisite for the purpose of making and delivering a correct and complete return,''
 which may seem clear, but it goes on: 
''so far as relating to the determination of the provision asserted to be the arm's length provision for the purposes of Schedule 28AA to the Taxes Act 1988 in a case where that Schedule applies.''
 I confess that, having read that for the eighth time, I am not entirely sure that I am any clearer about what it means. I would appreciate it if the Paymaster General could guide us through that. If the clause is to provide any benefit, it must be crystal clear. The question as to which documents and records are included must be clear. Given that, and given the related information offered in the guidance to taxpayers, will she put firmly on the record which documents are included and which are not?

John Burnett: I repeat the point that I made earlier. I stress to the Paymaster General that I do not want companies to avoid the transfer pricing rules, but if a company innocently goes over the threshold into the large company regime, and for various reasons—it may not have much experience or it may be an international trading group that has a bonanza profit in one year that takes it over the threshold—I hope that the Inland Revenue would, to use the words that I used earlier, be merciful and mitigate the penalties.
 I have also had a submission from the Confederation of British Industry, which says: 
''The transitional period to April 2006 only provides for the remission of penalties arising from inadequate records, and not for any other reason. The Inland Revenue Technical Note published with the Autumn 2003 Pre-Budget report said that the transitional rules 'are designed to give businesses more time to develop an understanding of transfer pricing requirements, and to adopt appropriate systems, before being exposed to penalties for failure to do so.' The remission of penalties for inadequate records only would not achieve this. A general remission of penalties is needed if the introduction of the new regime is not to place unreasonable burdens on taxpayers, particularly those mainly UK larger businesses, such as retailers, which have had little or no experience of transfer pricing issues to date.''
 I had hoped to hear from the Paymaster General on both the former and latter points. On the former, I am not trying to wriggle out of the transfer pricing rules. I am just asking whether the Revenue will mitigate the penalties regime in relation to a company that quite 
 innocently goes over the threshold into the larger company regime for transfer pricing.

Dawn Primarolo: The clause introduces a temporary waiver of penalties for inadequate documentation of transfer pricing for the tax years 2004–05 and 2005–06. As we have discussed, the transfer pricing rules were the most straightforward way to address current uncertainty for business. However, we recognise that it will take some businesses some time to adapt their record keeping fully to the new rules. I think that the hon. Gentleman would agree that the penalty waiver is a pragmatic measure to ensure that businesses have the time that they need to change their systems, and to minimise compliance costs.
 The relaxation of the penalty regime for a transitional period of two years will give businesses time to adjust to the new rules. It will apply to all businesses, large and small, and to all transactions, cross-border and domestic. During this period, businesses will not be exposed to the risk of penalties for failing to keep records that demonstrate that results are arm's-length results for transfer pricing purposes. 
 Of course, businesses still need to make a reasonable attempt to establish an arm's-length result for transactions with connected businesses. Businesses can use the information currently available to them to meet the requirement from the start. However, as I have said, we recognise that it will take time to adapt the record-keeping systems to the new rules, which is why we are making provisions in this area. In effect, the penalty rules will not apply automatically; the Inland Revenue will investigate and use its discretion. In applying that discretion, the Inland Revenue will take account of the circumstances, including any mitigating circumstances. That is the point that the hon. Gentleman was pressing me on earlier. 
 We want to be reasonable. At the end of the two years—at the end of the 2005–06 period—we want the transition to be made in the best way and the transfer pricing rules to run smoothly. That is our aim. In getting there, the Revenue will take mitigating circumstances into account. The records to be included are those that demonstrate that a price is arm's length. The Inland Revenue will not be prescriptive about the precise nature of the records. They are simply to establish the arm's-length price. 
 I hope that the hon. Gentleman can see that there is a generous relaxation across the board with regard to the penalty regime. In the transition period, businesses will not be exposed to the risk of penalty for failing to keep records that demonstrate that the results are at arm's length for the transfer pricing. That is an important point, and I hope that my response satisfies the Committee.

John Burnett: I hope that I heard the Paymaster General correctly. Did she say that, after the two-year period is over, the Revenue will take account of mitigating factors when it applies the penalty regime? My experience has been mainly with small and
 medium-sized companies, and I know that she is conscious of the fact that such companies do not have the in-house expertise that larger companies have.

Dawn Primarolo: I can confirm that Revenue discretion is always a feature of penalties, regardless of this clause, and there will be an additional waiver of penalties for record keeping during the transitional period. We are strengthening that and including additional provisions to respond to the points made in both this and previous debates. I hope that that satisfies the Committee, and I stress again that the Revenue will take the appropriate and understanding approach that I have outlined.
 Question put and agreed to. 
 Clause 33 ordered to stand part of the Bill.

Clause 34 - Payments of excessive interest etc

Mark Prisk: I beg to move amendment No. 12, in
clause 34, page 35, line 29, at end insert— 
 '(fa) in sub-paragraph (4)(c) after ''would apart from section 84A(2) to (10) of this Act'' insert ''and disregarding any adjustment which might otherwise arise under the provisions of this paragraph''.'.
 This is a probing amendment to deal with an anomaly concerning intra-group loans. It was tabled with the support of both the Law Society and the Chartered Institute of Taxation. The effect of subsection (4), which is an integral part of the clause, is that, when an intra-group loan is made on an interest-free basis, no exchange gains or losses will be disregarded on the debtor or creditor loan relationship. In many people's opinion, that does not go far enough, because it does not deal with cases in which an intra-group loan is advanced on interest-bearing terms to enable the borrower to obtain the benefit of matching treatment. 
 When the loan is treated as matched in such circumstances, there is nothing to prevent all or some of the exchange gains or losses from being ignored for tax purposes. Paragraph 11A(4)(c) and (5)(c) of schedule 9 to the Finance Act 1996 currently provides that no adjustment would arise on the exchange gains or losses when—this is the important point—there is a corresponding debt loan relationship and exchanged gains and losses are taken into account. 
 In plain English, the problem arises when the borrowing exceeds the amount that the borrower could have borrowed if it were dealing at arm's length and the loan were interest bearing. In those cases, but for matching treatment, an adjustment would arise on the borrower by virtue of the amended provisions in paragraph 11A(4)(c) and (5)(c). There is nothing to prevent an adjustment from arising under that paragraph. The danger is that that would leave the lender of the intra-group loan exposed to tax on, for example, exchange movements when it borrows in a foreign currency and on-lends an equivalent amount in foreign currency to a thinly capitalised UK subsidiary in order to finance the acquisition of that subsidiary. 
 The amendment is designed to draw from the Paymaster General the reasoning behind the 
 Government's decision and to deal with the anomaly that I have tried to explain. It is a complex issue and relates to different parts of legislation. It matters simply because many UK companies are increasingly and regularly investing overseas. The purpose of the amendment is to remove the anomaly that could prove to be a barrier to that. I hope that the Paymaster General can enlighten us on the thinking that the Government have applied to the measure.

Dawn Primarolo: I certainly do not want the hon. Gentleman to labour under any misunderstandings about the Government's approach to matching. We agree with him that the matching principle for exchange gains and losses should be preserved. To see that, he need look only at the Finance Act 2002, in which the Government strengthened the matching rules to allow more assets to be matched. We included in that Act paragraph 11A of schedule 9 to the Finance Act 1996 to ensure that transfer pricing and thin capitalisation considerations did not prevent matching from working. The matching arrangements that we are dealing with, and which his party introduced in 1993, are about interest-free loans between two companies in the same group. Our changes in 2002 preserved those arrangements, and nothing in the Bill or the transfer pricing proposals changes any of that.
 The Inland Revenue has been asked about this issue repeatedly and has published guidance on its website. It has explained the position to the firms that have asked, and the position is clear. If the loan is interest-free, there is no change. If interest is charged on the loan at the arm's-length rate, there is no change. Only if for some reason interest is charged at an excessive rate might there be an issue. That was the case under the thin capitalisation rules, too. We are dealing with a clause that is taking out thin capitalisation and putting the same arrangements within transfer pricing. 
 I hope that, with all those assurances, the hon. Gentleman will see that the amendment is unnecessary, because the matter is dealt with to ensure that groups are still able to match.

Mark Prisk: The Paymaster General has moved us an important step forward. Can she just clarify what ''excessive rate'' means? That is not simply a point of parliamentary pedantry; it is an important point for those seeking to understand the intention of the legislation.

Dawn Primarolo: The thin capitalisation rules disallowed excessive interest paid between companies in the same group if the amount of the loan exceeded the amount that could have been borrowed from an unconnected lender, or if the rate of interest were too high. Those rules have been in operation for some time, and companies' understanding of what is meant by ''excessive'' will still apply. Even if interest is charged at an excessive rate within the understood operation of the thin capitalisation rules, if the group as a whole could have coped with that amount of interest, the guaranteed rules that we have introduced may apply to remove the problem. Nothing really changes. The position is the same as it would have been under the thin capitalisation proposals. The
 clause puts in place within transfer pricing the ability to deal with such loans.

John Burnett: It is a double-edged sword. I just wonder whether the Paymaster General will put on the record the fact that, presumably, if the matching rules are breached or if matching is not permitted for the reasons that she has set out, and if there are exchange rate losses rather than gains, they can be set against corporation tax.

Dawn Primarolo: The hon. Gentleman tempts me into the incredibly complex area of transfer pricing. I want to focus his attention on the provisions in the clause, which will enable the group to match transactions so that its exchange gains and losses cancel each other. The rules work perfectly well now and will work perfectly well in the new environment of UK-UK transfer pricing if interest-free loans are involved. The Government sought to make no changes in their operation. I shall reflect on the issue that he raised in the more detailed question and perhaps, with your leave, Sir John, write to him and to other members of the Committee if I feel that I have not given a complete answer.

Mark Prisk: We have had a useful exchange, as several areas, not least that of excessive rates, were not clear to me and to some outside bodies that are affected.

John Burnett: Would the hon. Gentleman also be interested in knowing the answer to the question that I asked on exchange rate losses being set against corporation tax?

Dawn Primarolo: I replied to it.

John Burnett: That is fine.

Mark Prisk: I am not entirely sure whether I should comment on that intervention. Clearly, there is a web of relationships into which it would be better for us not to pry further. As I was about to say, given the discussion—indeed, the exchange—I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Question proposed, That the clause stand part of the Bill.

Mark Prisk: The clause deals with thin capitalisation and how it is incorporated in general transfer pricing requirements. We discussed under earlier clauses some of the broader issues that affect both transfer pricing and thin capitalisation, but there are a few points for clarification and information that may be helpful to the Committee, if the Minister can assist. The Institute of Chartered Accountants, among others, asked why in subsection (3) no account is taken of a guarantee if the guarantee is made on commercial terms; that is, the guarantor receives a fee in the same way that a bank might. Was that an intentional change, or does the Paymaster General recognise that it is an oversight? If it is an oversight, does she intend to amend it at a later stage?
 Several legal experts have asked about the possibility for elections to be made prior to the submission of corporate tax returns. The Paymaster 
 General may wish to reflect on that after our deliberations. Such a change would enable rating agencies to rate the issuing company on the same basis as the election. I believe that we all appreciate the important role that rating agencies play and therefore that when they undertake their task they should be able to make their consideration on the same basis as an impending election for an issuing company. 
 There are some problems with inconsistent language in subsection (3) on page 33. There is a reference to ''security'' on line 5 of new paragraph 1A but to ''the loan'' on line 9. The language is inconsistent. Some people would argue that the word ''security'' is inappropriate. Some outside experts have suggested that ''money debt'' might be a more appropriate phrase; I confess that that area is on the very edge of my understanding. I am led to understand that that is an important distinction, so perhaps the Minister could clarify that. 
 Lastly, I turn to subsection (4), on page 33. I shall not detain the Committee by reading out the relevant sub-paragraph at length—[Interruption.] Well, I may be tempted. The problem is that it is unclear generally, but there is a particular, important aspect of its lack of clarity, and that is whether it is concerned with a single company or a sub-group. I am sure that the Committee would appreciate it if the Minister could clarify that.

Dawn Primarolo: First, perhaps the questions of early election before a return is submitted would be more appropriately dealt with on clause 36, which has to do with elections. I think that we shall find it easier to deal with the matter in that context, and I am happy to come back to it.
 The hon. Gentleman asked whether the guarantor receives the same fee. That would undermine the effect of the thin capitalisation rule. A foreign-owned company could support a large amount of debt in a UK subsidiary through a guarantee, and the role of the thin capitalisation rule is to restrict interest deduction in line with the debt that the borrower could support through its own income and assets, not those of the entire group. The clause makes changes to the thin capitalisation rules that run parallel with the changes made to transfer pricing. The existing thin capitalisation rule is repealed and its equivalent is brought into the main transfer pricing framework. Consequently, as for other aspects of transfer pricing, the rules will apply to transactions wholly within the UK. 
 Thin capitalisation rules deal with a particular aspect of transfer pricing. As we discussed earlier, they exist to prevent companies from reducing taxable profits unfairly by means of excessive interest deductions. To do that, they deny interest deductions on loans to the extent that they exceed the amount that the company would borrow from, or would have paid in interest to, an unconnected lender. That approach is consistent with the arm's-length principle that forms the basis for transfer pricing legislation and bilateral tax treaties. It is therefore appropriate that thin capitalisation should be dealt with alongside transfer 
 pricing and to do that, the clause introduces two new paragraphs to the transfer pricing rules. 
 Those changes have been made following intensive consultation. Many features of the legislation follow directly from representations made during that process, and I am grateful to those who participated. In particular, there is a special rule to give a compensation adjustment to a loan guarantor, in clause 35, and a special rule to meet the particular needs of securitisations, which the hon. Gentleman touched on, in clause 36. 
 The loan guarantee rule provides a strong and necessary defence against dumping of excessive debt in the UK. At the same time, the compensating adjustment rule for loan guarantors ensures fairness and allows existing financial structures to remain undisturbed. For inward investment, it will ensure that all UK assets and income are taken into account in the determination. The clause is fairly based on practices, so I hope that I have dealt with the hon. Gentleman's queries. Perhaps we can pick up on his other points as we move onto clauses 35 and 36. 
 Question put and agreed to. 
 Clause 34 ordered to stand part of the Bill.

Clause 35 - Elimination of double counting etc

Dawn Primarolo: I beg to move amendment No. 75, in
clause 35, page 36, line 1, leave out first 'paragraph' and insert 'Schedule'.

John Butterfill: With this it will be convenient to discuss Government amendments Nos. 76 to 78.

Dawn Primarolo: Briefly, the amendments make detailed corrections to the clause to correct errors noticed since the Bill was published and to ensure that the clause has the intended effect. Amendments Nos. 75, 77 and 78 ensure that the definition of a paragraph 6C claim applies for the purposes of schedule 28AA as a whole. They correct the mechanism that allows lenders to make early claims for gross payment of interest. The correction is no more than a matter of terminology.
 Amendment No. 76 corrects a detailed cross-reference. It inserts a cross-reference into a rule that will allow a company to make a late claim to a compensating adjustment when the need arises. That is part of ensuring that the extension of transfer pricing rules does not lead to double taxation. 
 I apologise to the Committee for the need to make the corrections, but they have been identified since the Bill's publication, and they will enable it to operate as intended. I commend them to the Committee.

Mark Prisk: I welcome the amendments. It is quite clear that they are intended to correct errors in the body of the legislation. Accordingly, we have no objections to them.
 Amendment agreed to. 
 Amendments made: No. 76, in 
clause 35, page 36, line 15, leave out 
 '109(3)(b) of the Taxes Act 1988' 
 and insert 
 '111(3)(b) of the Finance Act 1998'.
 No. 77, in 
clause 35, page 39, line 4, leave out 'or 6C above' and insert 
 'above or a paragraph 6C claim'.
 No. 78, in 
clause 35, page 39, line 8, at end insert— 
 '(5) In paragraph 14(1) (general interpretation) insert the following definition at the appropriate place— 
 '' ''paragraph 6C claim'' has the meaning given by paragraph 6C(2) above;''.'.—[Dawn Primarolo.]
 Clause 35, as amended, ordered to stand part of the Bill.

Clause 36 - Balancing payments and elections to

Dawn Primarolo: I beg to move amendment No. 79, in
clause 36, page 39, line 18, leave out 
 'issued by the advantaged person'.

John Butterfill: With this it will be convenient to discuss the following amendments: No. 13, in
clause 36, page 39, line 19, leave out 'The disadvantaged person' and insert 
 'Any company other than the advantaged person (''the electing company'')'.
 No. 14, in 
clause 36, page 39, line 20, leave out 
 'condition in sub-paragraph (3) below is' 
 and insert 
 'conditions in both of sub-paragraph (3) and sub-paragraph (3A) below are'.
 No. 15, in 
clause 36, page 39, line 22, after 'condition', insert 'in this sub-paragraph'.
 No. 16, in 
clause 36, page 39, line 31, at end insert— 
 '(3A) The condition in this sub-paragraph is that arrangements are made by the electing company for securing the payment of any tax which, but for the election under this paragraph, would have been payable by the advantaged person in respect of the application of paragraph 1(2) above in relation to the relevant security by virtue of paragraph 1A above and those arrangements are approved by the Board for the purposes of this paragraph. 
 (3B) If any information furnished by the electing company for the purpose of securing the approval of the Board under sub-paragraph (3A) above does not fully and accurately describe all the facts and considerations material for the decision of the Board under that sub-paragraph, any resulting approval of the Board shall be void.'.
 No. 17, in 
clause 36, page 39, line 33, leave out 'the disadvantaged person'.
 No. 18, in 
clause 36, page 39, line 34, after '(a)', insert 'the disadvantaged person'.
 No. 19, in 
clause 36, page 39, line 36, leave out 'a chargeable period' and insert 
 'any chargeable period ending on or after the date of the election'.
 No. 20, in 
clause 36, page 39, line 38, after 'instead', insert 'the electing company'.
 No. 21, in 
clause 36, page 39, line 39, leave out 'that period' and insert 
 'any chargeable period ending on or after the date of the election'.
 No. 22, in 
clause 36, page 40, line 1, leave out 'disadvantaged person' and insert 'electing company'.
 No. 23, in 
clause 36, page 40, leave out lines 7 to 10 and insert— 
 '(aa) must be made no later than twelve months from the end of the chargeable period in which the relevant security is issued.'.
 No. 24, in 
clause 36, page 40, leave out lines 18 to 23.

Dawn Primarolo: I will briefly introduce amendment No. 79, but I will not talk about amendments Nos. 13 to 24 until the hon. Member for Hertford and Stortford has had the opportunity to speak to them.
 Amendment No. 79 extends the range of circumstances in which a special provision for securitisation may apply. As drafted, the Bill allows the securitisation rule to apply only where a transfer pricing adjustment is made to a company that is a borrower of a loan. The amendment allows the rule to apply whether the adjustment is made to a lender or a borrower. All the other conditions for the application of the rule remain the same. The amendment is being made following representations made since the Bill's publication which argued that there are circumstances in which transfer pricing potentially applies to a lender in the context of a securitisation, and that that might affect the rating of bonds issued under securitisation. The amendment will allow the special rule to apply in all circumstances, subject to the other conditions that are set out in the clause being met. 
 The Government consulted widely with the City before publication of the Bill, but other specialist representative groups made points following publication; hence the need for the amendment. I hope that the Committee will agree that it is a sensible solution and will support it.

Mark Prisk: I would welcome your guidance, Sir John, on whether I am correct in assuming that in addressing amendments Nos. 13 to 24, which overlap with the Government's amendment, I can respond to some of the points made by the Paymaster General.

John Butterfill: Absolutely. The proposal is that we should debate the Government amendment together with the hon. Gentleman's amendments, because they apply to the same issue. It would, of course, be possible to have a separate vote should the hon. Gentleman so wish.

Mark Prisk: Thank you, Sir John. I asked because, in considering a number of linked amendments, we might stray beyond the scope of Government amendment No. 79, although securitisation and ratings are at the heart of the matter.
 The neatest way to summarise the amendments is to say that their aim is to help the clause to achieve its purpose. They may overlap with the Government amendment, which has a similarly benign intention, but that will help us to draw out the meaning behind the clause. I take the point that the question raised in a previous deliberation about the interplay between securitisation and rating agencies is more appropriate to this discussion. 
 The securitisation market, to which the amendments refer, lays great emphasis on ratings given to securitisation and debt by rating agencies. I mentioned those earlier. The agencies have stringent requirements regarding the creditworthiness of the securitisation structure. If the new transfer pricing regime applied in full to companies within securitisation structures, there would be a risk that one or more of the companies concerned might not obtain tax relief for all interest payments. That would have an adverse effect on such things as cash flow. The existence of such a risk would have to be reflected in the legal opinions given to the rating agencies, and that might result in a downgrading of the securitisation debt. 
 The amendments deal with linked concerns arising from the current provisions relating to elections under new paragraph 7B. The election referred to in that paragraph is available only to the disadvantaged person, and part of that issue is addressed by the Government amendment. The disadvantaged person is a related person who is also involved in the transaction and is subject to UK tax in relation to it. Securitisation structures typically involve a group of companies, each of which has a specific role within the group. Limiting the election to the disadvantaged person might mean that the tax cannot be borne by the appropriate company within the group. The election should be capable of being made by any person, not just the disadvantaged person, with the important condition that the Inland Revenue is satisfied that the electing company will be in a position to meet the relevant tax liabilities; hence one of the amendments. 
 The election is capable of being revoked by the Revenue on notice, subject, of course, to paragraph 7. No time limit is imposed on the Revenue's ability to give such notice, and its right of revocation could be problematic in some cases, because the rating agencies will assume that the election is revoked and that some of the interest on the securitisation debt is not deductible. Part of the intention of the amendments is to try to ensure that groups are able to enter into arrangements with the Revenue with the result that the securitisation group is removed for all time from its liability under the transfer pricing rules. That would enable the Revenue to review the proposals in advance, but there would not be the risk of an election being revoked respectively. 
 Finally, an election under new paragraph 7B will be included in the tax return of the company making it for the tax accounting period in which the debt is issued. That could leave a period between a debt being issued and the return being made in which there is no 
 certainty that the election would be made. That happens sometimes, and it is a risk factor that rating agencies would need to take into account. One of the purposes of the amendments is to enable those elections to be made prior to the submission of the corporation tax return. 
 I fully understand that the Government amendment, which I saw after tabling my amendments, relates particularly to the question of advantaged or disadvantaged people. I welcome the Minister's comments on that. That in essence is the subject of the amendments—I say that having taken so long to explain them.

John Burnett: I think that the debate can be distilled to a relatively straightforward point. The rating agencies, which are crucial in these matters—
 Sitting suspended for a Division in the House. 
 On resuming—

John Burnett: I was saying that rating agencies in the securitisation market want certainty. The Paymaster General is aware how important these transactions are to the economy and that we want to make Britain the home for as many of them as possible.
 I shall dwell briefly on the three simple points made by the hon. Member for Hertford and Stortford. First, the election provision is in clause 36(2). Limiting the election to the disadvantaged person may mean that the tax cannot be borne by the appropriate company. I am sure that the Paymaster General will concede that that is unfortunate, given that certainty is very important at the start of these transactions, for the reasons I gave earlier. 
 Secondly, clause 36(7) states: 
''An election under this paragraph by a person is of no effect if the Board give that person a notice under this sub-paragraph refusing to accept the election.''
 It is a fairly simple point, balancing up the taxpayer's position; no time limit is imposed on the Inland Revenue's ability to give such a notice. Surely, there should be a time limit on the Inland Revenue for the purposes of certainty and in the interests of a fair and equitable tax system. 
 Thirdly, the hon. Gentleman made the point that the elections under new paragraph 7B are to be included in the tax return of the company making it for the tax accounting period in which the securitisation debt is issued. That will leave a period between issue of the securitisation debt and making a return when there is not complete certainty that the election will be made. That third point is, again, an issue of certainty. I hope that the Paymaster General will consider the important amendments suggested by the Law Society, in the interests of fairness to the taxpayers and in the interests of our economy.

Dawn Primarolo: In response to the hon. Member for Hertford and Stortford's amendments and to the three points made by him and the hon. Member for Torridge and West Devon, I have to say that the amendments would alter the way in which the rules
 dealing with a special case of securitisation finance worked. In short, where the effect of transfer pricing is to move tax liability from company A to company B, the Bill will allow an election to be made to transfer the tax liability from B back to A. The amendments would allow a group of companies to take a tax liability that had moved from company A to company B and move it to a third company, C. There is no need for such a change. By moving a tax liability back to where it came from, the rule will enable the impact of transfer pricing to be negated within the securitisation structure. It is not necessary to go further than that and to allow tax liabilities to be moved at a group's discretion.
 Secondly, the amendments would also remove the Inland Revenue's right of refusal of an election into the scope of the special rule.

John Burnett: Before the Paymaster General goes on to the second point, may I just say that I cannot see what the problem is with the first amendment? The Revenue will get the money and the fact is that it will not allow an election and that provisions can be drawn in if there is any risk that the third company will not pay the tax. If the Revenue is going to get the tax anyway, why bother? Why is the Inland Revenue concerned?

Dawn Primarolo: There is simply no need for such arrangements. As I explained to the hon. Gentleman, there is no need within the questions of securitisation raised by the clause to make arrangements to move tax liabilities to a third company. There is no need for such a change, so why make it? That is what I have been trying to make clear to the hon. Gentleman. No case has been made as to why it would be necessary to go further and to allow the tax liabilities to be moved at the group's discretion. That is how the transfer pricing rules have operated before and that is how we intend to proceed now.
 Secondly, the amendments would remove the Inland Revenue's right of refusal of an election into the scope of the special rule, and so remove an important safeguard against abuse of the election. That safeguard is necessary in transferring thin capitalisation rules by taking them out and by using transfer pricing and the special provisions from the Bill for securitisation. No case has been made as to why this or the earlier amendment concerning moving to company C should be allowed. Nobody else has that provision; why should it be necessary in this case? 
 Thirdly, the amendments propose an election that can be made and accepted by the Revenue after a loan has been issued, but before the tax return is made. Again, the amendments are not necessary. The election to opt into the special securitisation arrangements is automatically effective unless the Revenue opposes it. It concerns the tax liability for a return period and so it is appropriate that it is made on a return. It is effective for the entire lifetime of the loan or loans to which it relates. It is sensible. 
 The Revenue has published draft guidance on circumstances in which it might refuse an election. They are circumstances in which the arrangements are a sham or might lead to loss of tax. In other cases, I 
 can confirm that the Revenue will discuss prospective arrangements with the group and will give a reassurance where possible that an election will not be opposed. Therefore amendments Nos. 13 to 24 are not necessary: some are undesirable and others are unjustified. If the hon. Member for Hertford and Stortford decides to push his amendments to a Division, I will ask my hon. Friends to oppose them.

John Burnett: I shall endeavour to pick up the challenge on clause 36(2) and who can make the appropriate election. These transactions are often complex and often involve groups of companies. The answer to the Paymaster General's question is that if one has a group of companies one wants an election to be made by the company that will bear the tax. There is no reason why that should not be possible. Provided that the company is in a position to meet those tax liabilities, the Revenue has nothing to lose. These matters are complex. The corporate structures themselves are complex. A little bit of flexibility is being requested to enable the market to function more satisfactorily.

Dawn Primarolo: I do not agree with the hon. Gentleman. He still has not made the case. The Bill will put tax liability back where it would be in the absence of the transfer pricing rules. That is sufficient to ensure that transfer pricing changes do not adversely affect securitisation. There is no need to go any further, as the amendment seeks to do, which is why I ask the Committee to reject it.

Mark Prisk: It has been useful to table these probing amendments to try to elicit from the Minister a greater understanding of the Government's thinking. The benefits that might accrue in these circumstances are limited. The hon. Member for Torridge and West Devon has rightly added to the issue by trying to tease that out. While I understand that in one or two circumstances there is a legitimate risk about which the Revenue may have concerns, I am not entirely convinced by the Minister's argument as to the distinction between disadvantaged and other parties being able to participate or about the potential retrospectivity of the elections being revoked. That is a cause for concern.
 This will be only the beginning of the debate on the securitisation. The Minister has not responded thoroughly enough to the wrinkles and problems addressed by the amendments, but they are probing amendments and I will not press them to a vote. 
 Amendment agreed to.

Dawn Primarolo: I beg to move amendment No. 80, in
clause 36, page 41, line 14, at end add— 
 '(4) After paragraph 7C insert— 
 ''Guarantees etc: election to discharge tax liability instead of making balancing payments 
 7D (1) This paragraph applies where the following conditions are satisfied— 
 (a) both of the affected persons are companies, 
 (b) the circumstances are as described in paragraph 6(1) above, 
 (c) the actual provision falls within paragraph 1B(1) above. 
 (2) Sub-paragraphs (2) to (8) of paragraph 7B above apply in a case where this paragraph applies as they apply in a case where that paragraph applies, but with the modifications in sub-paragraphs (3) and (4) below. 
 (3) The relevant security is the security in paragraph 1B(1)(a) above. 
 (4) In sub-paragraph (4) (nature of the election)— 
 (a) for ''paragraph 7A above'' substitute ''paragraph 7C below''; 
 (b) for ''paragraph 1A'', in both places, substitute ''paragraph 1B''.''.'.
 The amendment extends the range of circumstances in which special provisions for securitisation may apply. It is made following representations received since the publication of the Bill. Thin capitalisation restrictions can apply to loans made between two connected companies or they can apply to loans from independent lenders if the loan is guaranteed by a connected company. 
 The Bill allows a securitisation rule to apply only where a transfer pricing adjustment is made to a loan made between two connected companies, and not to guaranteed loans. As I said, the amendment has been tabled following representations made since the Bill was published. Those representations concern circumstances in which thin capitalisation rules might apply to a guaranteed loan from an independent lender in the context of a securitisation, and might affect the rating of bonds issued under the securitisation. The amendment will allow the special rule to apply to such a loan, subject to the other conditions in the clause. The amendment therefore provides further protection for existing and future financing arrangements, and I commend it to the Committee. 
 Amendment agreed to. 
 Clause 36, as amended, ordered to stand part of the Bill.

Clause 37 - Commencement and transitional provisions

Mark Prisk: I beg to move amendment No. 26, in
clause 37, page 41, line 36, leave out '6th' and insert '1st'.

John Butterfill: With this it will be convenient to discuss Government amendments Nos. 81 and 82.

Mark Prisk: Amendment No. 26 would correct what I believe to be a potential error in the transitional provisions: line 36 of the clause refers to 6 April 2004, but it should refer to 1 April 2004. If it does not, the transitional provisions will not operate correctly for periods of account beginning on or after 1 April. I am aware of the Government's amendment, but it relates to a line further down. However, the fact that they have tabled the amendment suggests that the mention of 6 April was intentional, so I look forward to hearing the purpose behind that.

Dawn Primarolo: I am grateful to the hon. Gentleman for proposing a change to the commencement provisions in order to improve the
 consistency of their application. However, his amendment would make the commencement date different from the start of the assessment year. The year of assessment starts on 6 April, in contrast to the financial year, which begins on 1 April. However, Government amendments Nos. 81 and 82 would achieve the same objective as amendment No. 26, but in a way that keeps the introduction of the new rules as simple as possible by aligning the commencement date with the start of the assessment year. In those circumstances, I ask the hon. Gentleman to withdraw his amendment and count this debate as a score draw. I commend the Government amendments to the Committee.

Mark Prisk: Minor victories have to be taken when possible. I must confess that when I read the Government amendments, I was even more bamboozled than before as to what was right and what wrong. While I am momentarily ahead, I will take the good advice and beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Amendments made: No. 81, in 
clause 37, page 41, line 41, leave out '31st March' and insert '5th April'.
 No. 82, in 
clause 37, page 41, line 42, leave out '1st' and insert '6th'.—[Dawn Primarolo.]
 Clause 37, as amended, ordered to stand part of the Bill.

Clause 38 - Expenses of management:

Mark Prisk: I beg to move amendment No. 58, in
clause 38, page 42, leave out lines 15 to 19.
 We now move on to the question of management expenses, which is not quite as it sounds. Those members of the Committee who, perhaps, were hoping that this might be something more personal may be disappointed. 
 Generally, we welcome the new ''expense of management'' rules, as we might reasonably call them. The amendment relates to what we consider to be the one retrograde step in the clause. I hope, Sir John, to catch your eye in the stand part debate, so that I can examine the broader issue. 
 The amendment relates to subsection (1), which provides that expenditure of a capital nature generally does not count as management expenses. For a long time there has been a fairly grey area in relation to management and expenses, but there has always been quite a clear set of rules governing capital and revenue, particularly in terms of trading expenses. 
 At one extreme, there are the day-to-day expenses of managing investments, which are clearly allowable, both under the old and the new rules. At the other extreme are the costs directly associated with the sale or purchase of a capital investment, which have been commonly accepted as capital, and for which relief is potentially available under the capital gains rule. In 
 between those two extremes are the costs incurred in considering investment strategy or deciding which investments to buy and sell. The treatment of that activity becomes crucial when a transaction falls through, and particularly when it produces abortive, and often substantial, transaction costs. Under new section 75(3), such costs would be capital and no tax relief would be available for them. In other words they would be—this will be of particular interest to those who follow tax matters closely—a tax ''nothing''. 
 From reading the clause, and from a cursory glance at the Revenue's draft ''Guidance for Management Expenses'', it appears that the Government's line is that despite the absence of specific capital exclusion in the old rules, the view has always been that such costs were not management expenses so no relief was available. I hope that the Minister will confirm that that is the view of the Revenue and the Government and, if not, that she will explain the provision. 
 If that is the Government's view, most independent experts in the field would regard it as directly undermining a long-held distinction in which all costs of managing investments are allowable, but those incurred in acquiring an investment are not. There should not be a middle ground. 
 I shall refer briefly to the representations made by the CBI regarding this matter. It stated: 
''There is widespread concern over the proposed blanket disallowance of expenditure of a capital nature, which CBI members believe is both unnecessary and inappropriate, given the very different features of trades and investment businesses.''
 The issue has reached the courts, notably in the case of Camas plc v. Atkinson in 2003, which involved the substantial costs of evaluating a projected acquisition that did not proceed. The Revenue lost the case in the High Court in July 2003, and I understand that the decision was upheld in the Court of Appeal in April this year. 
 The Minister will realise, and I hope that she will comment on the matter, that the independent view of the vast majority of experts is that the loss of the case provoked the introduction of new section 75(3). That is why they dispute—they have good reason for doing so—the Revenue's assertion that the provision is reinstating a long-held and generally accepted view of the law. They genuinely believe, and the evidence seems to support their belief, that the case was reaffirmed only two or three weeks ago and that is the reason for the clause. 
 The purpose of the amendment is to try to remove what is generally perceived as being a retrograde step in what is otherwise a generally welcome reform. I hope that the Minister will reflect carefully on the points that I have raised on behalf of those who are directly affected by the legislation.

John Burnett: May I make a quick point? I wonder whether the Paymaster General will clarify the position of capital allowances in relation to the expenses of management companies and companies with investment businesses. When such a company invests in computers and suchlike, presumably the effect of subsection (3) of new section 75 is not to
 gainsay the ability of the company to claim capital allowances on such purchases. I hope that the Paymaster General can give us the necessary reassurance that that is not the case.

Dawn Primarolo: The Inland Revenue has always argued that under current law capital expenditure does not form part of allowable management expenses. In line with that view, the clause is not intended to restrict relief.
 This provision, by stating that capital expenditure is excluded from relief, will ensure that relief for the expenses of managing investments in the context of an investment business is aligned with the rules for trading expenditure. Capital expenditure cannot be deducted when calculating the profits of a trade for tax purposes and it would be inconsistent and unfair to trading companies to allow a more advantageous treatment for investment business. 
 The general issue of relief for capital expenditure across the corporation tax system is best considered in the wider context of the corporation tax reform programme so that a consistent approach can be maintained. That exercise is continuing, and we have had a great deal of help from business, for which we are very grateful. Indeed, I referred earlier to that continuing debate on corporate tax reform. 
 The rule is one that I am sure companies will be able to apply in practice without undue difficulty. The distinction between capital expenditure and revenue expenditure has been developed by the courts over a long period and is fundamental to our direct tax code. The Inland Revenue has published draft guidance on how the test will be applied, and it will revise the guidance when it has fully considered the implications of the Camas case. 
 The rule on capital expenditure is but one aspect of the new management expenses regime. The Government are modernising the rules in response to representations received over a period of years, to extend relief for managing investments. That broadening of the scope of relief has been widely welcomed by business. The new regime will enable more companies to gain relief for the expenses incurred in managing their investments. It will also make it easier for companies to calculate the deductions to which they are entitled.

Mark Prisk: I accept the broader points, and we may have an opportunity to consider them in a moment, but does the Paymaster General accept that the provision creates a tax nothing? Given that the Government's shared objective with business is to reduce, if not eliminate, tax nothings, does that not conflict with the Government's overall aims?

Dawn Primarolo: The TUC—that was a Freudian slip. The CBI has made representations on management expenses.
 To make the deletion requested by the hon. Gentleman would double the costs to the Exchequer of introducing the change. It is more appropriate to deal with the matter in the review that I have explained to him, so that we can see the system developing in the round. 
 The CBI's comments yesterday were submitted to each member of the Committee, and I am delighted that the CBI welcomes the extension of tax relief for the expenses of management investment, because it will benefit companies. It is new, and the Government are giving up tax revenue to provide that support to companies. As the CBI recognises, that removes a barrier that has created difficulties for holding companies that manage their subsidiaries and have their own trading activities. 
 The hon. Gentleman, referring to the CBI, said that it thought that the disallowance of capital expenditure was unnecessary and inappropriate because trading and investment businesses have different features. We cannot accept that there is a relevant difference; traders and investors will buy capital assets that yield income. Why? They are retained by the business. Traders will buy premises and machines, and investors will buy shares that yield dividends in properties from rents. It is right to make it clear in legislation that the rules for trading expenses and expenses for management investments are aligned. 
 On intervention, the hon. Gentleman said that the CBI thought that a nothing would arise from the new tax. In fact, the changes being made will remove the tax nothing and the potential for expenses of management investment to be denied relief because they are incurred by a company that does not qualify as an investment company. Although I understand that the CBI would like more, the proposals are very generous towards management expenses, and I ask the Committee to reject the hon. Gentleman's amendment should he press it to a Division.

Mark Prisk: It has been a useful discussion. The Paymaster General rightly quoted the CBI welcoming the broad principle of the provisions, and I entirely concur with that point. However, she sought to suggest somehow that the CBI's supporting evidence could be put to one side. I am not entirely sure that one can accept that welcome but reject the awkward parts of it.
 The Paymaster General also seemed to say, ''Yes, there is a new tax nothing, but the good news is that we have got rid of a different one, so the net result is that we have merely replaced one tax nothing with another.'' If she wishes to correct that assumption, I am more than happy to give way.

Dawn Primarolo: I was going to respond to all the hon. Gentleman's points in one go, but I said that the changes being made would remove a tax nothing. I thought that that was quite clear. I did not say that the provisions created it and then removed it; I said that they removed a tax nothing.

Mark Prisk: I am glad that the Paymaster General has clarified her view because from her original statement it was unclear whether she accepted that there was a new tax nothing but that the benefit of the general proposals was that a different tax nothing was being lost, and that therefore there was a net balance. It is important to stress that because industry is working towards the reform of corporate taxes, and
 merely to move forward but then take two steps back, or perhaps to be fair, one step back—

Dawn Primarolo: It has been a good debate but the hon. Gentleman is being somewhat unfair and so is business. Earlier, we heard the argument that we should not introduce provisions piecemeal; now we hear that we should introduce piecemeal the provisions that business definitely wants and take them out of the review. The management expenses are specific to the transfer pricing as well as the other arrangements that recognise the pressure on companies. I have made it clear that the corporate tax review of capital expenditure is the correct place to take the matter forward. Detailed discussions are taking place, and I thought that business wanted that rather than a rushed patch now.

Mark Prisk: I hope that we will not have any rushed patches at all. I suspect that we will have to agree to disagree in this area. The purpose of the amendment, as far as I was concerned, was to probe and to test the Paymaster General's exact view. I think that we have succeeded in doing that. I do not intend to press the matter to a vote. I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Question proposed, That the clause stand part of the Bill.

Mark Prisk: A moment ago, we debated an amendment looking at a retrograde step that is part of the proposals; we turn now to their broader aspect. As I said earlier, we welcome the generality of what the clause represents. The clause, and the supporting clauses from 39 onwards, removes the requirement to be an investment company—in other words, one not involved in the trade—in order to claim the deduction from management expenses under section 75 of the Income and Corporation Taxes Act 1988.
 It is fair to say that a number of difficulties have tended to arise when a company's activities are a mixture of trading and investment. That occurs most commonly in a group situation with holding companies that not only own subsidiary company's shares but carry on a trade at the same time. In larger groups, holding companies may well not carry on any—or any significant—trading activity, to avoid that problem. Sometimes no tax relief has been available to a mixed investment and trading company for any of the investment and management expenses, where the extent of the trading activities means that it is not an investment company for tax purposes. From talking to a number of those affected by the changes, and, indeed, from considering the responses to the Government's management expenses consultation, it is clear to me that, in most respects, the legislation before us reflects a successful consultation and a positive dialogue, subject to the specific difficulty that we just debated. 
 I also understand that the Association of British Insurers—to name but one example—is broadly content with the legislation of life assurance company-related management expenses. I think that comes a little further on; nevertheless it is an important part of the overall statement. 
 I think that if there is one area that is questioned, it is that relating to unallowable purposes, which is also referred to in the Government's draft guidance for management expenses. I conclude by saying that it would be helpful for the Committee, and for those organisations affected by the legislation, if the Paymaster General clarified exactly what is meant by an unallowable purpose.

Dawn Primarolo: The hon. Gentleman has covered the clause fairly adequately in that, first, it extends the range of companies able to obtain the tax deduction for the expenses management. Secondly, it puts the time of the reduction in a clear and modern basis; and thirdly, it recasts the complex rules for similar deductions for life assurance companies into a free-standing logical code. There has been consultation on those matters, and it has been widely welcomed by business.
 The only point on which the hon. Gentleman seeks further clarification is the unallowable purpose test. He says that it needs clarification, perhaps in relation to management and investments in subsidiaries, especially—perhaps this was in the submissions sent by the Chartered Institute of Taxation—with regard to overseas subsidiaries. The point is clarified in the explanatory notes and the draft guidance published on the Inland Revenue's website. It is not relevant to the application of the test that a subsidiary company whose shares are held by a company that is seeking management expenses relief is not within the corporation tax charge. 
 If the hon. Gentleman wants to raise any further issues once he has read the draft guidance published on the Inland Revenue's website, I will be more than happy to receive his representations. I can assure him that the concern that the unallowable purposes test is too restrictive is without foundation, which I hope is shown in the explanatory notes and the draft guidance. I accept that the hon. Gentleman may not have had time to consider these matters, but, given that the guidance is draft and we are receiving comments on it, I will be more than happy to receive his if he feels that the guidance does not adequately deal with his points. 
 Question put and agreed to. 
 Clause 38 ordered to stand part of the Bill. 
 Clauses 39 to 41 ordered to stand part of the Bill.

Schedule 6 - Expenses of companies with

Dawn Primarolo: I beg to move amendment No. 83, in
schedule 6, page 277, leave out lines 41 to 45 and insert 
 'for ''an investment company'', wherever occurring, substitute ''a company with investment business''.'.
 Schedule 60—I am sorry. I will start again; it has been a long day. I know that I often put lots of noughts on the end of things, but on this occasion it is inappropriate. 
 Schedule 6 contains the more important consequential adjustments arising from the changes to management expense rules. The amendment affects a provision dealing with an avoidance device known as loss buying. That is when a company changes ownership so that the new proprietors can take advantage of its unused management expenses. The amendment removes a misleading description of the provision being amended as a consequence of the reform of management expenses rules. It also ensures that the necessary change of wording is made each time that the words that need amendment occur in the provision—three in all. 
 The amendment is slightly more substantial than previous Government amendments, but it is designed to clarify and ensure that the descriptions of the provisions are accurate. I commend it to the Committee. 
 Amendment agreed to. 
 Schedule 6, as amended, agreed to. 
 Clause 42 ordered to stand part of the Bill.

Clause 43 - Companies with investment business:

Dawn Primarolo: I beg to move amendment No. 84, in
clause 43, page 51, line 22, leave out '41' and insert '46'.
 The amendment changes an incorrect reference, which became clear after the Bill was published. I apologise for the error. The amendment makes the necessary adjustment, and I hope that the Committee will agree to it. 
 Amendment agreed to. 
 Clause 43, as amended, ordered to stand part of the Bill.

Clause 44 - Insurance companies:

Dawn Primarolo: I beg to move amendment No. 85, in
clause 44, page 53, line 29, at beginning insert 'the old'.
 The amendment is a minor, clarifying one. It makes it clear that when the straddling period rule for insurance company expenses refers to a section that is replaced by a new version under clause 38, the reference is to the old version in the section. It is a minor change, but important as it ensures that the Bill reads correctly. 
 Amendment agreed to. 
 Clause 44, as amended, ordered to stand part of the Bill. 
 Clause 45 ordered to stand part of the Bill.

Clause 46 - Power to make consequential amendments

Question proposed, That the clause stand part of the Bill.

Mark Prisk: I simply want to make one brief comment. The Paymaster General has kindly written to the Committee about clause 46 because it contains a regulation-making power. She has sought to supply us with a 23-page statutory instrument of delegated powers in order to help us have an informed debate. I welcome that and I am grateful to her. Unfortunately, it arrived at 9.30 this morning. I expect Committee members will have been disappointed not to have had the opportunity to deal with it, and I hope that the Paymaster General will recognise that that is a problem. I have one simple question for her: will she confirm that the statutory instrument will be debated on an affirmative basis, which will allow us to consider the elements within it?

Dawn Primarolo: Before I confirm the nature of the statutory instrument, it is important to say to the hon. Gentleman that I sent a draft copy of the secondary legislation to the Committee. We are currently carrying out a consultation on the regulations. In sending the regulations, I was in a dilemma as to whether a draft would be helpful when it is still subject to consultation and may change. On reflection, however, I thought that it was important to send it. The draft regulations have been published on the
 Inland Revenue website, and I have not yet had a report on the responses to the consultation.
 On the nature of the statutory instrument, I understand that it is subject to the negative rather than the affirmative procedure, but I am happy to check that and confirm it to the hon. Gentleman in writing, and circulate it to all Committee members as a courtesy. That is the normal procedure, but I want to stress that a consultation is taking place about the draft regulations. Given that the measures are widely accepted in the facilitation of management expenses, they are without controversy. 
 Question put and agreed to. 
 Clause 46 ordered to stand part of the Bill.

John Butterfill: The question is, That further consideration of the Bill be now adjourned.

Stephen Pound: No.

John Butterfill: Order. While I am putting a question, I will have silence in the Committee.
 Further consideration adjourned.—[Jim Fitzpatrick.] 
 Adjourned accordingly at twenty-one minutes to Six o'clock till Thursday 13 May at half-past Nine o'clock.